Although BCE Inc. (BCE) is expected to generate healthy revenue growth through higher wireless revenue, stable wireline revenues, and cost reduction methods, its revenue mix is heavily weighted toward traditional telephone business, the demand for which is gradually waning. This is hurting its revenue and EBITDA growth.
Additionally, BCE operates in an environment crowded with new wireless carriers. Bell Canada, a 100% subsidiary of BCE, faces cutthroat competition from national carriers Telus Corporation (TU) and Rogers Communications Inc. (RCI).
We believe BCE remains benefited from the acquisition of CTV and the addition of the new Bell Media unit that will result in an earnings upside going forward. The company’s best-in-class HSPA+ network, continued growth in smartphone adoption and an expanding LTE wireless networkare expected to boost wireless growth prospects. Further, the company remains committed to returning maximum value to its investors through increased dividend payouts and share repurchases.
On the wireline front, BCE continues to benefit from improving NAS erosion, high-speed Fiber-To-The-Node (FTTN) and fiber-to-the-home (FTTH) networks as well as growing traction in both Fibe Internet and Fibe TV services. However, BCE is lagging in the IPTV rollouts that are putting pressure on its overall revenues. The company is experiencing declining average revenue per user – the lowest among the three national carriers – largely due to a fall in voice usage and roaming, as a result of softness in the Canadian economy.
Moreover, the company generated flat year-over-year revenue (excluding its CTV acquisition) in the first nine months of this year while its major rival Telus recorded 6.5% growth in the same period. Being a reputed competitor in IPTV, Telus is benefiting from lower wireless competition in western Canada.
Furthermore, the entry of additional wireless carriers,competition from cable companies and persistent decline in network access services may limit the potential upside of the stock.
Hence, we remain on sidelines on Canada’s largest telecom carrier and are maintaining our long-term Neutral recommendation with a Zacks #3 (Hold) Rank.
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